International REIT ETFs: Hedging Real Estate Globally

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 |  Includes: DRW, EQR, HCP, IFGL, PSA, RWO, RWX, SPG, VNO, WPS
by: MyPlanIQ

International REIT ETFs are becoming increasingly popular with the investor community as they represent a safe and liquid way to invest in large international real estate projects and companies. They also offer investors and money managers a very convenient way to hedge their investment/real estate portfolios against local interest rate volatility.

Asset allocations to international REIT ETFs are specifically catching on with low-tax retirement investment accounts like IRA investments and 401K investments since they give pension investors the opportunity to safely invest in high-growth emerging market real estate companies and projects which in turn significantly improve their net portfolio return over the long term.

The 2008 credit crisis took its toll on all real estate assets worldwide; including international REIT ETFs. Even though they have recovered significantly in the last three years, they continue to underperform most asset classes including U.S. REITs and bonds. The primary reason for this underperformance remains the relatively high interest rates prevalent in most of Asia. Furthermore, current equity market weakness and flight to the safe haven U.S. dollar also hurt international REITs. However, with interest rates finally beginning to decline in Asia, things will look up once the risk asset markets recover.

Let us take a look at the performance of international REIT ETFs vis-à-vis other asset classes.

Major Asset Classes Trend

11/15/2011

Description

Symbol

1 Week

4 Weeks

13 Weeks

26 Weeks

52 Weeks

Trend Score

Gold

GLD

-0.1%

7.12%

-0.32%

19.77%

32.37%

11.77%

Commodities

DBC

-1.72%

1.56%

-3.48%

-2.37%

14.26%

1.65%

US Equity REITs

VNQ

-3.11%

5.38%

0.95%

-4.88%

12.81%

2.23%

US Stocks

VTI

-1.42%

3.24%

5.83%

-5.14%

9.84%

2.47%

Total US Bonds

BND

-0.12%

0.85%

0.73%

4.12%

6.06%

2.33%

International Treasury Bonds

BWX

-2.03%

-1.21%

-3.94%

0.22%

5.65%

-0.26%

International REITs

RWX

-3.74%

-1.62%

-6.3%

-13.55%

-4.26%

-5.89%

Emerging Market Stks

VWO

-3.48%

3.33%

-3.71%

-13.25%

-6.58%

-4.74%

International Developed Stks

EFA

-3.63%

-1.76%

-4.88%

-14.67%

-6.84%

-6.36%

Click to enlarge

See here for a detailed analysis of asset class performance.

As we can see, international REIT ETFs continue to under perform most asset classes including U.S. REITs and bonds. The primary reason for this underperformance remains the relatively high interest rates prevalent in most of Asia. However, with interest rates finally beginning to decline in Asia, things will look up in the days ahead. The current underperformance must be used to accumulate international REIT ETFs for the long term.

Let us now examine some popular and liquid international REIT ETFs.

International REITs

11/11/2011

Description

Symbol

1 Yr

3 Yr

5 Yr

Avg. Volume(NYSE:K)

1 Yr Sharpe

SPDR Dow Jones Global Real Estate

RWO

1.82%

18.4%

NA

87

8.24%

WisdomTree International Real Estate

DRW

-2.02%

19.84%

NA

38

-7.47%

SPDR Dow Jones Intl Real Estate

RWX

-5.46%

15.96%

NA

414

-24.07%

iShares S&P Dev ex-US Property

WPS

-9.11%

18.47%

NA

15

-42.32%

iShares FTSE EPRA/NAREIT Dev Real Estate

IFGL

-12.1%

13.09%

NA

54

-59.81%

Click to enlarge

See here for more on ETFs linked to different asset classes.

Analyzing the data given in the table above, we can see that RWO is the only international REIT ETF from the list which has given a positive return (1.82%) in the last year. It also has decent daily average volumes (87k) and the best Sharpe ratio (8.24%), making it the best long-term investment candidate from the list. RWO tracks the Dow Jones Global Select Real Estate Securities Index and has a net asset value of $304.93 M.

Let us check out the top holdings and the country-wise allocations for RWO.

Top 10 Holdings (29.81% of Total Assets)

Company

Symbol

% Assets

Simon Property Group, Inc. Comm

SPG

6.03

UNIBAIL-RODAMCO

UL.PA

2.95

Public Storage Common Stock

PSA

2.92

WESTFIELDG STAPLED

WDC.AX

2.78

Equity Residential Common Share

EQR

2.77

BAM.TO

2.60

HCP, Inc. Common Stock

HCP

2.59

Vornado Realty Trust Common Sto

VNO

2.44

8801

2.39

Ventas, Inc. Common Stock

VTR

2.34

Click to enlarge
Click to enlarge

FUND COUNTRY WEIGHTS

As of 11/16/2011

United States

54.27%

Australia

8.37%

Japan

7.94%

United Kingdom

5.92%

Hong Kong

5.65%

Canada

5.40%

France

3.92%

Singapore

3.53%

Switzerland

1.16%

Austria

0.80%

Netherlands

0.77%

Sweden

0.72%

Belgium

0.44%

South Africa

0.40%

New Zealand

0.37%

Germany

0.07%

Italy

0.07%

China

0.06%

Click to enlarge

Taking a closer look at the data, we find that RWO has a decent mix of retail sector REITs (SPG, VNO, WDC.AX) and commercial real estate companies (UL.PA, BAM.TO) and should do well as interest rates decline in the Asia Pacific and growth picks up. Similarly, the country-wide break-up shows an interesting mix of western developed markets like the U.S. (54.27%), the U.K. (8.37%) and Germany (0.07%) alongside fast-growing Asia Pacific economies like China (0.06%), Hong Kong (5.65%) and Australia (8.37%). Any future price contraction in the Western countries will be offset by appreciation in Asian real estate investments, especially Hong Kong and Australia where rate cuts have already begun.

To sum it all up, we advise using the current adverse market conditions to invest in international REIT ETFs like RWO for the long term. However, we must remember that negative news flow from Europe or another phase of global growth deceleration can lead to continued underperformance in the short term.

Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.